Economic Development Growth Engine Looks to Make PILOTs More Effective

By Amos Maki

For years, the payment-in-lieu-of-taxes incentive used to recruit or retain jobs in Memphis and Shelby County has been a lightning rod for criticism, particularly from municipal labor unions who view the incentives as corporate welfare that erodes the tax base.

That long-running criticism reached a boiling point two weeks ago as the City Council voted to slash some benefits for retirees. Many municipal union leaders said the tax breaks given to companies to locate or expand in Memphis and Shelby County were to blame for the government’s fiscal woes and the need to cut benefits.

Memphis Fire Fighters Association president Thomas Malone, citing a union-backed study of the PILOT incentive, said tax freezes given to companies would have prevented the cuts to health care benefits for retirees that were recently approved by the council. Malone’s comments followed a series of advertisements that claimed city leaders favored corporate tax breaks over citizens.

DULBERGER

Reid Dulberger, head of the Economic Development Growth Engine of Memphis and Shelby County, which administers the incentive program, has heard the criticisms of the PILOT program and earlier this year launched a wide-ranging review of the system that could lead to the most significant reforms in the program’s history.

“I would describe it as a complete review of the PILOT program with the intent of making it more effective and cost efficient for the community,” Dulberger said.

Dulberger said the debate raging over municipal benefits and the PILOT program have no impact on the study, which could be completed in the fall.

“What we’ve committed to doing is sifting through all the recommendations and coming up with a set of recommendations for the EDGE board,” Dulberger said.

EDGE hired Sharon Younger of Younger Associates, an EDGE vendor who has previously consulted with the Greater Memphis Chamber, which shares a symbiotic relationship with EDGE, to conduct the review. It includes getting input from commercial real estate brokers and developers, elected officials, PILOT recipients, the general public and chambers of commerce from across Shelby County.

The PILOT program works by abating taxes – 85 percent on the city side this year, before dropping to 75 percent next year, and 75 percent on the county side – for real and personal property improvements. Companies pay the full amount of taxes on the pre-developed land. A scoring matrix that includes the number of jobs created, wages, capital investment and other factors determines the length of the PILOT term.

A cost-benefit analysis is performed to ensure that for every $1 in taxes abated at least $1 in new taxes is produced. To qualify for a PILOT, companies must produce at least a $1 to $1 tax ratio, and the vast majority of PILOT recipients far exceed that amount.

If Memphis or Shelby County is competing with another community that has a similar building, site or infrastructure, the PILOT can tip the scales in favor of Memphis and Shelby County, Dulberger said.

“The purpose of the program is to alter the decision-making process for firms opening new facilities or expanding facilities,” he said. “Whether we like it or not, the PILOT program is an integral part of that. We are expecting a lot out of a property tax abatement program.”

Memphis and Shelby County have relied heavily on the PILOT program to offset the cost of property taxes to businesses that locate or expand here.

A 2010 report from the Tennessee Advisory Commission on Intergovernmental Relations said exemptions and tax incentive programs suck “millions of dollars in uncollected taxes” from local governments and “impose unfair tax burdens on households and businesses” that don’t receive the incentives.

A recent letter from the state comptroller to city and county leaders also warned about the effects of the “aggressive use of PILOTs as an economic development tool.”

But Dulberger and other officials say the program has helped produce jobs and capital investment that might not have happened without a PILOT.